SEC Proposes Security-Based Swap Rules From Dodd-Frank

Dec. 15 (Bloomberg) -- The U.S. Securities and Exchange Commission proposed rules governing clearing of securities-based swaps, including how companies that use derivatives to hedge risk will seek exemptions from tighter clearing requirements.

SEC commissioners voted 5-0 today to seek comment on an end-user exemption measure that matches one approved by the Commodity Futures Trading Commission on Dec. 9. The Washington-based regulators, writing rules for the derivatives market as directed by the Dodd-Frank Act, must decide how to exempt interest-rate, currency and commodity hedging trades.

The SEC end-user proposal gives step-by-step instructions showing utilities, manufacturers and agricultural businesses how to trade derivatives to hedge risk without being subject to margin and capital demands imposed by Dodd-Frank, the financial-regulation law enacted in July.

“The end-user exception empowers commercial businesses to use either cleared or non-cleared security-based swaps that best suit their risk-management needs,” SEC Chairman Mary Schapiro said before commissioners voted. The rule will specify the steps that end users must follow to gain exceptions, she said.

The SEC measure would require a company seeking the end-user exception to send information to the SEC about how it will meet its financial obligations in a security-based swap. The options include a written credit support agreement, an agreement to pledge or segregate assets, a third-party guarantee or basing it solely on the counterparty’s available financial resources.

Data Repository

The regulator also would seek information on the company pursuing the clearing exemption for end users. That data would include identifying information and how the trade is being used to mitigate commercial risk. That information would be channeled into a swap data repository.

The SEC is also seeking comment on whether financial firms with less than $10 billion in assets should receive an exemption from clearing requirements for security-based swaps.

Clearinghouses would have to get SEC approval for any group or type of security-based swap they are planning to accept for clearing. The rule describes the information the clearinghouses would have to submit so the SEC can decide whether the swap should be subjected to mandatory clearing. The submissions would then have to be posted on the clearinghouses’ public websites.

Clearinghouses designated as “systemically important” would have to submit advance notice to the SEC before making changes to their procedures, the agency said.

Conflict Minerals

Commissioners also voted unanimously to propose rules that would require U.S. companies to expand disclosure of their use of so-called conflict minerals -- tin, tantalum, tungsten and gold from the Democratic Republic of Congo whose export has help fund wars in that African country. Dodd-Frank requires that companies using those metals ensure their purchases are “conflict-free.”

The idea is “to get a handle on the purchase of minerals that are fueling the conflict in the Congo, which has become one of the most urgent humanitarian crises in the world,” said Adam Kanzer, general counsel for Domini Social Investments.

The other two proposals would require more company disclosures regarding mine safety and would require resource-extraction companies to disclose payments to governments.

To contact the reporter on this story: Jesse Hamilton in Washington at

To contact the editor responsible for this story: Lawrence Roberts at